QCA board evaluations: a framework for AIM boards to respond to the ESG trend

It’s unlikely that quoted companies using the QCA code will want to report anything other than they have adopted the QCA Code and are compliant with all of its Principles and that Disclosures required by the QCA Code have been made both in their annual report and website.

They could also use their evaluations at this time of change in societal attitudes as an opportunity to improve board decision-making performance in relation to the primarily behavioural QCA Principles, especially 3, 7, 8, & 9 which include taking into account “wider stakeholder and social responsibilities”; seeking “continuous improvement” in board performance; promoting a corporate “culture that is based on ethical values and behaviours” and supporting “good decision-making processes” by the board.

The verbs used in these QCA Principles create a low bar for compliance: taking into account, seeking, promoting and supporting.

Much harder is creating an environment in which decision-making behaviour by each director ensures that these Principles are lived rather than ticked.

The incentive for living the Principles is strong: at a time of pandemic society, which grants business its mandate to trade, will look for higher standards of behavior from directors in these behavioural areas as business becomes more part of the S in ESG than apart from it.

Those companies taking advantage of COVID financing and furlough schemes will find that many of their employees, customers, suppliers and ESG-minded investors will expect them to pay more attention to ESG related Principles and, where required, to report properly on compliance with Section 172 of the Companies Act 2006 which requires directors to have regard to issues beyond shareholder return. The QCA Principles can enable compliance with S172.

If the board steps back and finds a shared language to express its wider purpose within society, then it’s more likely that it will comply with Principle 3, and mean it.

If each director were to negotiate and “trade” small changes in their behaviour as reasonably requested by colleagues then the aggregate impact on performance of these small changes would have a big impact on outcomes and enable easy compliance with Principle 7 along the way.

If ethics were promoted as a company-wide responsibility and not someone’s job title and people were given permission to call out ethical misbehaviour then Principle 8 would be lived rather than ticked.

If your board appointed a Devil’s Advocate by rotation at each board meeting with permission to challenge anything said at that board meeting by anyone, then adherence to Principle 9 on decision-making could be, above all else, the potential saviour of the company in avoiding major risk events and spotting and exploiting opportunities earlier than they might.

But no code will make directors care about environment, society and governance issues, if they don’t. There was a time when this didn’t matter and to some extent that’s still the case.

But the zeitgeist suggests that directors who ignore ESG related Principles may be drinking in last chance saloon. At the very least they should consider the risks to themselves, if not the business, that they could be in for a hard time by investors, customers, employees, and the wider community – if not the regulator – after last orders.

Your QCA evaluation can create a framework for behavioural change, not just compliance.

Ciarán Fenton

After many years practising as a generalist leadership consultant working with leaders, boards and teams I’m now focused on facilitating board evaluations using FRC, QCA and Wates codes and principles as well as ESG awareness. Endorsements for my work can be seen here: https://www.linkedin.com/posts/ciaranfenton_please-can-you-like-this-if-you-would-be-activity-6722128127906091008-5HZB

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